Key takeaway

The Supreme Court overrules the Chevron two-step framework and instructs courts to independently determine the best meaning of a statute without any deference to federal agencies.

In more detail

Loper Bright and Relentless arose from a challenge to the validity of certain fishing regulations that required fishermen to pay the salaries of government monitors who embarked on their vessels to ensure that the fishermen did not exceed the limits on the amount of fish they could lawfully catch. The underlying statute authorized the government to charge fishermen in the North Pacific for the salaries of government monitors, but it did not expressly authorize regulations to require fishermen in New England to do so. Fishermen sued in both the D.C. Circuit and the First Circuit. In a split decision, the D.C. Circuit in Loper Bright concluded that the statute was ambiguous at Chevron Step One and that the agency’s interpretation of the statute to allow industry-funded monitoring was reasonable under Chevron Step Two. The dissent argued that the agency action was invalid under Chevron Step One because the statute's silence unambiguously indicated the agency lacked authority to regulate, rather than create ambiguity. In the First Circuit’s opinion in Relentless, the court simply declined to classify its conclusion as a product of Chevron Step One or Two but nonetheless upheld the validity of the regulation. The Supreme Court granted certiorari in 2023, heard oral argument in January 2024, and issued an opinion on June 28, 2024, overruling the Chevron framework and directing the lower courts to reconsider the issues by identifying the best interpretation of the statute without according deference to the views of the agency. 

Over the 40 years since Chevron was decided in 1984, the Chevron two-step has morphed into what the Supreme Court majority in Loper Bright called a "dizzying breakdance." Loper Bright, No. 22-451, slip op. at 32. After Loper Bright, judicial analysis should become an elegant waltz to simply determine the single, best interpretation of the statute. A reviewing court need no longer grapple with the vexing question of whether the statute is ambiguous or unambiguous, or whether silence creates ambiguity. Nor must courts defer to "permissible" agency interpretations of ambiguous statutes. Now, it “makes no sense to speak of a 'permissible' interpretation" (as Chevron did) because “[i]n the business of statutory interpretation, if it is not the best, it is not permissible.” Loper Bright, No. 22-451, slip op.at 23. And while a reviewing court, exercising independent judgment, may accord “respect” to the views of the agency, those views must earn weight as a consequence of their persuasive force.

Initial implications for the tax rulemaking process

Most Treasury Regulations and IRS guidance are simply interpretations of operative statutes. The Supreme Court in Loper Bright made clear that federal agencies don’t have any unique expertise in statutory interpretation, which is the daily fare of federal judges who routinely use the traditional tools of statutory construction to determine the meaning of statutory text. The Court in Loper Bright clarified that a court’s view of the meaning of a statute is informed not only by the agency’s perspective but also by the parties before the court as well as amici. 

This clarification puts a premium on active participation in the rulemaking process. The views of taxpayers are at least as important as the views of Treasury and the IRS. Tax practitioners in the private sector also have deep experience in interpreting and applying the Code. Taxpayers should leverage their tax expertise and actively engage with Treasury and the IRS through comment letters to identify the best interpretation of the statute. Doing so will provide Treasury and the IRS with a helpful and necessary perspective and ensure their interpretation fully accords with the text of the operative law. And if Treasury and the IRS decline to the follow the interpretation set forth by commenters, then the agencies will need to provide a reasoned explanation for why their interpretation of the statute is the best. The robust administrative record developed contemporaneously with the rule will also help guide a reviewing court in their independent evaluation of the best interpretation of the statute and in determining whether the agency's interpretation evinces thoroughness, valid reasoning, and consistency such that the court should treat it as persuasive. 

Initial implications for tax disputes

In recent years, Treasury and the IRS have been increasingly aggressive in their rulemaking, which has produced regulations that purport to override or rewrite clear statutory text regardless of whether Treasury and the IRS claim to be acting pursuant to a specific grant of rulemaking authority or the more general grant under section 7805. While many taxpayers and industry groups informed Treasury and the IRS that some of their regulations are contrary to statute and exceed the agencies’ rulemaking authority, the government has been recalcitrant. Taxpayers should closely monitor these regulations, which include (but are not limited to):

• The section 965 regulations that purport to disallow credits for foreign taxes paid on section 965(b) previously taxed earnings and profits (a.k.a. Offset Earnings).
• The section 78 regulations that purport to disallow a section 245A dividends-received deduction for certain section 78 dividends that arise in connection with a taxpayer’s section 965 inclusion.
• The section 245A regulations that purport to disallow dividends-received deductions for or limit the applicability of section 954(c)(6) to distributions of earnings and profits in relation to what the IRS refers to as "extraordinary disposition" or "extraordinary reduction" transactions.
• The section 951A regulations that purport to allocate a deduction or loss attributable to what the IRS calls the “disqualified basis” in a CFC’s intangible property solely to "residual CFC gross income" and not to income that is factually related to the deduction.
•  The proposed stock-buyback excise tax regulations, which purport to create a novel "funding rule" found nowhere in section 4501.
• The forthcoming proposed regulations announced in Notice 2024-54, which purport to override the Code’s mechanical basis-allocation rules in certain partnership transactions involving related parties.

The decision in Loper Bright may also reopen options for administrative resolution of regulatory validity disputes, as it undermines the premise for IRS Appeals' wholesale ban on considering these issues. The IRS concedes that the Appeals function encompasses "interpretation of … the Federal tax laws". See 87 Fed. Reg. 55934, 55936 (Sept. 13, 2022). As Loper Bright clarifies, consideration of the validity of an agency regulation is a matter of statutory interpretation. If a truly neutral and independent Appeals team can engage in that analysis in other circumstances, it should also be able to do so when faced with regulatory validity disputes. 

Conclusion

In light of the decision in Loper Bright, taxpayers should consider their willingness and approach to participating in the rulemaking process and evaluate when and how to raise regulatory validity matters at all stages of a tax dispute, including at Appeals. In addition to Loper Bright, the Supreme Court’s decision in Ohio et al v. Environmental Protection Agency, No. 23A349 (June 27, 2024), and Corner Post, Inc., v. Board of Governors of the Federal Reserve System, No. 22-1008 (July 1, 2024), as well as the Tax Court's recent decision in Valley Park Ranch, LLC v. Commissioner, 162 T.C. No. 6 (Mar. 28, 2024) (as explained in our client alert), merit close reading with respect to these considerations.